Further falls in residual values predicted by FN50

A challenging used car market in 2019 has had a significant negative impact on the optimism of leasing companies for residual values (RVs) in 2020, the FN50 survey suggests.

With prices achieved for ex-lease cars falling month-on-month for at least the first nine months of last year, leasing companies have seen disposal profits eroded across the board. For end-user fleets, the past 12 months have proved a wise time to have outsourced RV risk.

In several cases, defleeted cars have failed to achieve the residual value forecast for them back in 2015 and 2016, and the majority of FN50 leasing companies have little faith that the situation will change this year.

More than half (52%) think RVs will fall in 2020, and only 15% forecast a rise.

This outlook is significantly gloomier than forecasts made this time last year for 2019, when 36% predicted residual values would fall, but it is more positive than the 12-month outlooks in both 2016 and 2017, when leasing companies were gripped by a doomsday scenario for the UK’s EU exit.

Brexit continues to blight the automotive sector, with the Society of Motor Manufacturers and Traders (SMMT) attributing the decline in both new and used car sales in 2019 to consumer confidence being “undermined by political and economic uncertainty”. The result is a temporary loss of appetite for big ticket purchases, it says, with vehicle owners holding onto their cars for longer.

Under normal circumstances, a decline in new car sales and a steady rise in new car prices should prompt an uplift in used car sales as buyers switch to secondhand models. But this tipping point in the supply-demand balance of the used car market has failed to materialise.

Cap HPI reports that franchised dealer groups have focused on their new car sales to qualify for quarterly manufacturer bonuses, at the expense of the used cars on their forecourts, and any shortfall in stock from fewer part-exchanges has been more than offset by the availability of used stock returning to the market after the record new cars sales of 2015 and 2016.

The result is FN50 leasing companies anticipating an average decline of 2.2% in RVs over the next 12 months. Among the 52% of leasing companies who predict a decrease, the average drop is 5.6%, a greater reduction than the 4.4% forecast a year earlier.

Even the most optimistic leasing companies are less bullish than previous years, with those forecasting an increase average a rise of 4.9%, compared with 3.6% in 2018 and 3% in 2017.

However, pricing experts are less bearish about the next 12 months.

“Things are not going to be as bad as they appeared over the first half of this year,” said Andrew Mee, Cap HPI head of forecast. “It’s our view that the market correction is pretty much over now.”

The far steeper than normal month-on-month drops in used car values in the second quarter of 2019 have come to an end, adds Mee, who says the “market is now behaving much more normally. Values will not increase, but they are not falling like they did earlier this year”.

Moreover, ‘peak diesel’ may have already occurred, with the sharp falls in the sale of new diesel cars in 2017 and 2018 potentially leading to an undersupply of used vehicles in 2020 and 2021. “And that will be good news,” said Mee.

But uncertainty remains. As one leasing director asked, will the rapidly evaporating demand for new diesel cars, down 20.3% year-on-year in 2019, and 30% lower in 2018 than 2017, be mirrored in the used car market, or will lower supply create a shortage that drives up prices?

Similar uncertainty is starting to bedevil the forecasting of residual values for electric and hybrid company cars. Company car drivers keen to minimise their benefit-in-kind (BIK) tax bills are fuelling double, and even triple digit, growth in the sales of some alternative fuel vehicles, but will this demand be matched in the used car sector where the tax advantages are far more limited?

In the short term at least, Mee sees a windfall heading the way of leasing companies with electric and hybrid cars on their fleets. Electric cars are worth significantly more now than they were a year ago, he says.

“Leasing companies will have been cautious in their RV forecasts, so they are in for a nice surprise, especially for smaller battery electric models like the Nissan Leaf, Renault Zoe and Citroën C-Zero,” said Mee. “Hybrid cars have not been such a strong story, but their values have not fallen in line with petrol and diesel prices because they are around in smaller volumes and are seen as green alternatives to petrol and diesel.”

The critical figures for leasing companies, of course, are not book values, but the differentials between the RV forecasts made at the start of leases and the disposal prices achieved at the end.

Grosvenor Contracts Leasing is one of the few FN50 members with a positive outlook for residual values in 2020, having returned better defleet figures this year than last. The company’s commitment to preparing vehicles to the highest standards prior to auction – “dealers don’t want to be buying work,” said Shaun Barritt, CEO, Grosvenor Group – has underpinned the prices it achieves and maintained high first-time conversion rates.

Above all, the company’s success lies in
envisaging ideal forecourts in three or four years’ time, says Barritt, ensuring a broad mix of cars.

“Problems arise when you are bulk buying and bulk supplying, but seldom do we have very high volumes of one make or model,” he said.

This issue is repeatedly raised by smaller leasing companies, who compare their broad model mix and ability to be nimble when remarketing with the lack of flexibility of the largest FN50 companies that have to remarket scores and even hundreds of similar vehicles into a soft used car market.

In Northern Ireland, Donnelly Fleet sells virtually all of its passenger cars via nine used car centres run by the Donnelly Group dealer network.

“We are not dealing with big scales, so we’re not going to flood our forecourts with 30 or 40 identical vehicles,” said Tony Magee, general manager, Donnelly Fleet.

“The market here is smaller and a sizeable deal could see six-to-15 vehicles coming back, so I can put one into each of our centres. With these volumes we can be more optimistic about RVs.”

Even so, Donnelly Fleet is putting in contingencies across all fuel types, rather than writing residual value forecasts at 100% of Cap Monitor, adopting a position shared by many FN50 firms.

The turbulence in the used car market, which saw book values tumble by about 15% between January and August, last year, has cost leasing companies about £800 per car at disposal.

“You would have to go back 15 years to find drops like that,” said Nick Hardy, sales and marketing director of Ogilvie Fleet.

He adds that after years of relative stability, the leasing industry had become accustomed to relatively low levels of depreciation, making the drop in values such a bombshell last year.

Previously, market falls of the magnitude experienced in the first nine months of 2019 would have seen leasing companies encourage their clients into contract extensions, but such protection appears to have been absent this year.

Figures provided for the FN50 show that the proportion of cars returned late has actually fallen by seven percentage points to 32% in 2019, compared with 2018. Interestingly, the two companies with the most bullish forecasts for 2020 have very few late returned cars.

“Nothing should stop us being optimistic. I am cautiously optimistic that the worst is over. People will still want to change their cars,” said Hardy.